Friday, April 04, 2008

More than 300 individual lenders, some who risked their retirement accounts, are expected to auction 338 acres in the Placer Vineyards development Wednesday in hopes of recouping some of the $51 million they're owed by a now-defunct company that bought the property in a complex deal. It's one of the largest foreclosures in the region so far -- an offshoot of a Las Vegas company's bankruptcy and a symptom of the hard-hit housing market.

The property is owned by the defunct Placer County Land Investors LLC, which raised $31 million to buy the land in 2004 through individual lenders who signed on for a minimum of $50,000 each. As a group of individual investors they are allowed to foreclose on the property and auction the land. Those primary lenders had hoped to earn double-digit returns but find themselves trying to wring whatever value they can from the property. More than 100 secondary lenders who agreed to take a subordinate position when they loaned a total of $6.2 million for the land purchase would receive nothing from a foreclosure, said Gerald Gordon, a Las Vegas attorney.

New statistics show regional home building off to a slow start in 2008, with 798 new-home sales in El Dorado, Placer, Sacramento, Sutter, Yolo and Yuba counties. That's 57.7 percent fewer sales than in the same months of 2007, according to Hanley Wood.

Demand for new homes may not return to normal levels until next decade, according to the latest outlook from the National Association of Home Builders. "Traditionally when housing has been in a recession, it recovers very quickly. We don't see that happening this time," said Jerry Howard, CEO of the builders' trade group. "It could be 2010 before we see sustainable, long-term stability in the home building sector."

Home prices will bottom out about the same time foreclosures top out, which we believe will be in the first half of 2009. Efforts by Congress to stem the tide of foreclosures are likely to be modestly successful at best. A very large proportion of foreclosures, which we estimate to be around 40 percent, are on homes purchased by investors and speculators. There is little Congress or the lending community can do to prevent these borrowers from going under, which will result in sharply higher foreclosures and price declines in investor-laden markets, such as Florida, Arizona, Nevada and California’s Central Valley.

Driving around depressed developments ringed by almond orchards, John Pedrozo, a Merced County supervisor who represents Planada, could not contain his distress. "I've lived here 50 years and I've never seen anything like it," said Pedrozo, who grew up on a dairy farm. "Businesses are closing, people going bankrupt. And the empty houses are vandalized." A common problem, he said, is that on weekends, vacant, foreclosed houses are crashed for wild parties and trashed....Merced County, population 246,000, underwent a housing boom over the past few years that saw developments spring up on what used to be farmland, said Rep. Dennis Cardoza, a Democrat from Merced. Now, in towns like Atwater, housing values have dropped as much as 50 percent, the congressman said. "The impact on these small towns and cities is huge," Cardoza said. "In my district, I believe we are already in a recession."

It is true we are starting to see some subtle shifts in the Sacramento real estate market. But the only thing dramatic is the anecdotal comments of other Realtors who are saying there is increased activity....What I remain concerned about is the rate of foreclosures we are seeing in the Sacramento area...I don’t see any solutions to this trend and suspect our rate of foreclosure to continue to outpace the rest of the country through 2008....Watching the housing market is interesting but it is what happens with the overall economy that is important right now. Our Sacramento economy is tied to construction and government and neither is a strong driving force right now....I learned my lesson with some previous overly optimistic predictions for our local real estate market. Right now I am being cautious and want to see the foreclosure numbers come down before I start to smile.

Sacramento area residents are very pessimistic about the region's current housing market. Only three percent of area residents think the housing market will take six months to recover, and 17 percent say it will take a year. The majority (51%), however, believe it will take two to three years for the market to recover, and 24 percent even claim the housing slump will last at least four years of more. Close examination indicates that regardless of county of residence, homeownership status, race, age, political party affiliation, the overwhelming majority think it will take at least two years before the regional housing market recovers....Currently, sixty-three percent of area residents believe 2008 is a good time to buy a house in the Sacramento region; 47 percent say now is a good time and 16 percent claim six months from now would also be a good time. Only 30 percent of residents think that the best time to buy a house in Sacramento is at least a year from now....

It might be reasonable to expect that the dynamics of the current bust will be similar to the previous bust. After another year (or two) of rapidly falling prices, it's very likely that real prices will continue to fall - but at a slower pace. During the last few years of the bust, real prices will be flat or decline slowly - and the conventional wisdom will be that homes are a poor investment.

The Los Angeles bust took 86 months in real terms from peak to trough (about 7 years) using the Case-Shiller index. If the Composite 20 bust takes a similar amount of time, the real price bottom will happen in early 2013 or so. (But prices would be close in 2010).

To the extent that the subprime meltdown is tied to declining house prices rather than interest rate resets, other borrowers, including prime borrowers, also could be affected. Indeed, while default rates for the latter loans are lower than for subprime loans, delinquency rates among all categories are highly correlated with house price declines across regions of the country. More formal statistical analysis confirms that differences in house-price change account for most of the regional differences in delinquency rates, whether borrowers are prime or nonprime, or whether loans have fixed or variable rates.

This analysis underscores the importance of house-price movements both to future developments in the housing sector and also to the ultimate magnitude of credit losses that are likely to be realized by leveraged financial institutions on their holdings of mortgage-backed securities and other housing-related loans. Looking ahead, it seems likely that the period of house price declines will not be over very soon, since some models of the fundamental value of houses suggest that prices are still too high, and futures markets for house prices indicate further declines this year.

11 comments:

That sucks about the folks losing their retirement funds. I'm wondering how that deal got put together. Seems to me like something they saw on an infomercial.

Traditionally when housing has been in a recession, it recovers very quickly.

Journalists REALLY need to be sharper, and not let ridiculous comments like this get published without scrutinity. At least the next comment was reasonable.

Home prices will bottom out about the same time foreclosures top out

Another example where a journalist should use their brain and perhaps challenge the comment. Certainly, there is to be a large lagtime between when forclosures peak and slowly reside before all of the excess inventory can get brought back down and prices can stabilize.

More formal statistical analysis confirms that differences in house-price change account for most of the regional differences in delinquency rates

One can't help but wonder what kind of fancy "analysis" the Fed came up with before they could finally reach the common sense conclusion that declining prices effect delinquency rates.

Currently, sixty-three percent of area residents believe 2008 is a good time to buy a house in the Sacramento region; 47 percent say now is a good time and 16 percent claim six months from now would also be a good time.

Wow. People really are clueless.A) Find sandB) Dig hole in sand size of headC) Insert head

It is true we are starting to see some subtle shifts in the Sacramento real estate market.

What a genius. Must be an econ major. I won't what tipped her off, the 30% yoy decline in prices or the front page of every newspaper. And she's like "it's true" like it wasn't true until she actually posted it in her 2 bit blog. Must be a close cousin to Sippin.

I think Sold in '05, from the water cooler and an earlier comment thread, first brought the Placer Land Investors, LLC bit to our attention -- long before this article. He/she was noticing legal notices filed in a smaller county newspaper, and had posted asking if anyone here knew what was going on. I think a Lander blogger just scooped the press. Sure hope Sold is still around to read this info.

Whether it's a good time to buy or not is really a individual question based on on individual circumstances and timelines. It certainly is a bad time to sell, regardless of any circumstance.

Smf...you're a good example by double ending a deal...actually selling (or dumping?)into this market in order to buy what you've been looking for. Hope all goes smoothly on both sides for you.

Prices are down around 40% right now and if another 10-20% comes off the top, before the market stabilizes, that 10-20% might be perfectly acceptable for someone who intends a long stay in that home. Imho, the majority of the original risk is now factored into real estate pricing today. The first 40% was rather easy and predictable by many on this blog. Those expecting an encore might be surprised how difficult it will be to squeeze another 40% off.

I can't digest(although anything is possible) more than 60% off the highes due the impact it would have on the local economy. Much deeper than that and those wanting to buy will have other factors weighing in that will make the decision more difficult.

Again, congrats to you Smf. A true contrarian play. You are buying into the storm and you'll likely come out just fine.

I like Julie! She's hanging in there selling $137K homes. I don't see the future RE intermediary being an independent broker like her though. Must be an independent middleman/website making revenues from volume.

Way to play it, smf. Working both ends of the deal like that is a difficult feat to pull off. It's easy to sell if you are willing to cut your own price, but it is really hard to buy right now at the same time because you have to convince another seller to cut theirs. And, eventually, your new house will be worth a good amount more than you paid for it, and you'll be very happy to be Prop 13'd into a lower tax rate than if you had waited. Bravo! Although, really, I would expect nothing less from a blogger who has been so pessimistic - er, realistic - about the housing market ;)